IHT planning must include an all-round review of assets
© GNP A full inheritance tax (IHT) review should not only look at the farming and business assets, but draw up a list of all items that might come into charge for the tax, says Robert Hood, associate director at accountancy group Xeinadin.
“There are a lot of other assets that haven’t been considered [in post-Budget IHT planning] because the focus has been on the impact on farming and business assets,” he says.
An all-round review could lead to tax-saving moves in advance of the implementation of the new regime, planned for April 2026, when many farming and business assets will become chargeable to IHT.
In the meantime, lobbying against the changes continues.
See also: IHT net set to catch farm pension funds – what to consider
Those other assets include savings, investments and rental properties, which will attract no relief and so will be subject to a 40% tax charge once any personal nil rate bands (£325,000 for each individual) and the residence nil rate band (an additional £175,000 on qualifying property, subject to eligibility rules) are used.
“For example, if you have cash either in a current or savings account, or certain shares not associated with the farm, those will all be taxed at 40%,” says Robert.
“So in some cases, it may be better to convert that cash or other assets to land, where it will at least get 20% relief (subject to eligibility criteria being met).”
Alternatively, is it time to spend cash built up over the years on personal enjoyment or interests, rather than see it dwindle by being subject to 40% IHT, he asks.
Disputes risk rises where changes are not thought through
Sudden asset transfers or sales as part of inheritance tax (IHT) planning increase the risk of family disputes, warns John Tunnard, inheritance disputes partner at law firm Shakespeare Martineau.
He highlights the potential for problems if family members feel promises have been made or expectations have not been met regarding inheritance.
“For instance, where a family member has worked on the farm in expectation that they would one day inherit it, but this does not occur.
Or, where adverse tax consequences have not been carefully thought through, a beneficiary might inherit assets which attract tax and, therefore, the value of the assets they receive is unintentionally impacted,” he says.
“Any financial imbalance or perceived unfairness can trigger tensions. Early communication and consultation are essential to avoid falling out with loved ones and taking family disputes to court.”
The main changes to IHT from April 2026 are the introduction of a £1m 100% allowance for an individual’s combined property value qualifying for 100% Agricultural Property Relief, 100% Business Property Relief, or both.
Thereafter, only 50% relief will be available on combined qualifying property. Currently, qualifying assets attract either 100% or 50% relief on death, depending on the type of asset.
John also sets out a few reminders:
- IHT charges can, in some instances, arise immediately on lifetime gifts, so it’s important to check the implications of any moves before acting
- From 6 April 2026 the government is extending the option to pay IHT by instalments over 10 years, interest-free, on all property eligible for agricultural property relief or business property relief
- Development land sales and options raise cash but must be carefully planned to make sure they are both tax-effective and commercially viable for the farm as a whole.
CGT vs IHT
Another consideration is to weigh the potential IHT bill against any likely capital gains tax (CGT).
Gifts of qualifying agricultural land can normally be made during lifetime without CGT being incurred.
This is done by electing for holdover relief, whereby the recipient inherits the CGT liability of the donor and a CGT bill is triggered only when the recipient subsequently sells (or gifts) the property.
If the land has been held for several decades or longer, the base cost for CGT liability calculation will be revalued to its 1982 value.
However, with the main rate of CGT at 24% – and possibly rising again in the future – if it is likely that the property will be sold by the recipient, then a calculation needs to be done to check which is the higher bill.
CGT on a gift made during lifetime and triggered when the asset is then sold, or 20% IHT on a gift on death (after £1m tax-free), when no CGT liability arises.
“It’s cheaper in some cases to pay the IHT,” says Robert.
Buildings and repairs
Consider whether the farm needs investment, he advises.
If so, and if there is cash available, again the better return may be to invest in infrastructure improvements to convert that cash from attracting 40% IHT to an investment that will gain 20% relief.
This may, at the same time, potentially attract some income tax relief as a trading expense, depending on the nature of the expenditure.
Cash gifts from excess income
There is also the option to give cash gifts out of excess income. This must be income above the level you normally need to live your current lifestyle.
These gifts do not attract IHT as long as they do not affect your lifestyle, points out Robert, but this option is not generally well known.
To comply with the rules on this aspect of IHT, such gifts should be made regularly, for example school fees or rent paid for children or grandchildren attending university.
Insurance investment
While life cover is not affordable in all circumstances, it can be tax efficient to pay premiums with cash that would or could otherwise be subject to 40% IHT if left in the estate.
The life cover will be written in trust so that the payout does not come into the estate and can then be used to pay IHT.
“You need to weigh up the likely cost of the premiums over time against the potential IHT savings,” Robert says.
Pensions
Pension funds are also set to attract IHT at 40% from April 2027, so as with cash and other non-qualifying assets, these will need to be considered carefully in due course.
Advisers are waiting for government guidance on this.
Marriage
Robert’s final tip is to consider getting married, or forming a civil partnership, as transfers on death between spouses and civil partners are IHT free.
While this might sound flippant, he points out that there are many farming couples who have not yet formalised their relationship.
Provided the relationship is secure, this should at least be considered and the tax benefits calculated.
Robert also points out that every case is different, with no “one size fits all” solution.
“It may end up being a blend of strategies. It is a good opportunity to perform a full IHT review, which must include all assets, many of which may be subject to 40% IHT now, regardless of the impending APR/BPR rule changes.
“In respect of the April 2026 changes, it’s important to start the conversations early. Speak to your advisers and family while we await draft legislation.”
Living abroad for 10 years gains IHT-free status
Although not directly related to Agricultural Property Relief, for those with foreign assets, one option that may be worth considering is to live abroad for a while.
“New rules announced in last autumn’s Budget mean that the estate of anyone leaving the UK and living abroad for 10 years or longer will not be subject to UK IHT on their foreign assets,” points out Stephen Kenny of accountant PKF Littlejohn.
“While living abroad, the amount of time an individual can spend in the UK and still keep their estate outside the scope of IHT will be limited.
“After 10 years living abroad, they may return to the UK for up to nine years before their estate would fall back within the IHT net.”
The UK’s 40% IHT rate is one of the highest in the world, ranking fourth among Organization for Economic Cooperation and Development countries.